By Irma Adelman, Distinguished Fellow, American Economic Association

We are living in an era of great uncertainty coupled with major structural change.  The structural change affects not only the US economy but also its demographic structure, its technology, its communication system and its global economic relations. In addition, we are in the middle of two wars, locking us into substantial military and economic assistance expenditures.  Furthermore, the political system has become dysfunctional and the economy paralyzed.  No wonder economic growth has become stagnant and unemployment rampant.

Along demographic lines, we are experiencing an increase in the fraction of population of retirement age that is not compensated by an increase in people of working-age.  In addition, there has been a rise in life-expectancy.  The net result is that a greater share of GNP must be devoted to maintaining retirees and providing them with health-care. Also, a larger share of the work-force must be imported and we must graduate into a post-industrial age.

Technical change has had many different ramifications.  Production has become more high- education intensive. The speed of the communication-system has become instant from virtually all points of the globe. It has therefore become possible to decentralize production globally, while maintaining managerial and technical control  in the US with a consequent  globalization of production in what are nominally US-firms coupled with  a 24-hour production cycle. And the transmission of news across the globe has become essentially instant, accelerating economic, financial and political reactions to events happening anywhere in the world.

Personal investment strategies need to adjust to take the current economic outlook into account. During periods of stagflation stocks usually decline. Bonds yield very low nominal returns. In fact, bonds currently yield negative real returns when one factors in present rates of inflation. Financial assets are therefore unattractive as well as unusually risky. This leaves real assets, and, in the short run, foreign currency.

Among real assets, the traditional major form of investment in housing and real estate holdings is unattractive, since their prices are declining precipitously, and there seems to be no end in sight. Indeed, this, together with the collateralization of mortgages and the evolution of derivatives is the basic cause of the current US financial crisis.

So, currently, the best form in which to hold savings is in tangible assets other than housing. These include, but are not limited to, precious metals, natural resources and art.

Art has exhibited a number of trends. During the past several decades, art has escalated in value. In fact, on the average, rates of returns from art have exceeded those from stocks. The biggest price increases have been for contemporary art, followed by impressionist and modern art, and by old masters.

The major names, with long established museum credentials, have withstood the test of time best and yielded the greatest price increases. Buying a nice work by an unknown artist is like going to the gambling tables in Vegas: you never know what will happen in the long run. In contrast, works by known artists of great repute have yielded the largest returns. Picasso, Chagall, Miro, Calder, Warhol, and Vasarely are just a few artists whose works come to mind.

Lastly, on a personal note, art, of course, has another advantage. Art is inspirational, and is the tangible commodity that not only increases in value but also gives visual pleasure and stimulation.

Irma Adelman, FRSA
Thomas Forsyth Hunt Chair
Professor Emerita,
University of California, Berkeley School of Agricultural Economics
Fellow, Econometric Society

Fellow, American Academy of Arts and Sciences

Fellow, the Royal Society for the Encouragement of Arts, Manufactures & Commerce

Fellow, American Agricultural Economics Association

Order of Bronze Tower, Government of South Korea, 1971

Vice President, American Economic Association, 1979-80

Women's Hall of Fame, University of California at Berkeley, 1994

Distinguished Fellow, American Economic Association, 2004

Laurea ad Honorem in Economia Politica, Universita Di Parma, Italy 2005